Samsung Galaxy Note 10.1 Offers Company Tidy Profit, Just Not on Sale

Samsung can earn a higher profit on the Galaxy Note 10.1 than Apple does on its iPad, but it has to maintain its price, says IHS. So far, Apple has been the only vendor able to sell high volumes at $499.

Samsung will likely make more dollars per each Galaxy Note 10.1 it sells than Apple makes on its iPad, IHS iSuppli reported Aug. 24, following a teardown of the newest Samsung tablet. However, there's a big if involved.

Samsung continues to "seek the magic formula" that will enable it to rival Apple's share of the tablet market, said the report. If with the Note 10.1 it can mimic the success of the original Galaxy Note-a "phablet" with a 5.3-inch display and an S Pen stylus that Samsung has already sold more than 10 million of-it will be on to something. But to cash in on that success, it will need to hold firm to its price point.

"The hardware profit margin for the Galaxy Note 10.1 only holds true if Samsung is able to maintain its initial price," Rhoda Alexander, director of tablet and monitor research for IHS, said in an Aug. 24 statement.

"And therein lies the rub," she continued. "No Apple rival has yet demonstrated the capability to actually sell in volume at $499, instead falling back on price cuts in order to drive volume."

After a preliminary breakdown of the Galaxy Note 10.1's components, IHS estimates that an HSPA+ version that retails for $640 has a bill of materials (BOM) of $283-or $292 when manufacturing costs are included. That tally doesn't include software, licensing, royalties or other expenditures that cut into Samsung's profits.

A WiFi-only model was found to have a BOM of $260.

IHS earlier found a comparable third-generation iPad, with WiFi connectivity, 16GB of memory and a $499 price tag, to carry a carry a BOM of $316.

Samsung is the only smartphone manufacturer that has proven it can stand up to the Apple iPhone, and in the tablet space, it's also proving Apple's only real competition. While brands like Google and Amazon have followed a model that offers the hardware at a price that yields no profit but offers the promise of high-volume sales and ongoing software-side profits, Samsung's model is more akin to Apple's-and more, it has some of Apple's same tricks up its sleeves.

"One of Apple's major competitive advantages is its dominance in semiconductor spending. This allows Apple to command more favorable pricing from its suppliers, helping to reduce its costs and expand its profit margins," said the IHS report. "However, Samsung can counter this advantage by leveraging its own internal sources of supply."

In the Note 10.1, Samsung supplied both the flash and DRAM memory, the core processor, the battery and a number of other components.

Additionally, Samsung leans on parts that are used across a number of its devices.

"By using cross-platform components, Samsung can better leverage pricing with outside suppliers, and further reduce the incremental cost of developing other devices," IHS Director Andrew Rassweiler said in a statement.

He offered the examples of the quad-core Samsung Exynos process, used in both the Note 10.1 and the Galaxy S III smartphone, and the Intel wireless chipset, also shared by the two.

Can Samsung use a few of Apple's tricks to defeat it?

That's for consumers and business users to decide. As for the IHS staff, they believe the quad-core processor will offer a noticeably strong user experience. However, they added that the tablet "isn't breaking new ground in term of technology. As is usually the case with such hardware releases, each device offers only an incremental set of improvements compared to the previous generation."

The teardown team at iFixit, on the other hand, found the Note 10.1 to be quite a thing apart from the iPad 3. While the latter is nearly impossible to fix, or to do so inexpensively, they found the Note 10.1 to be quite the opposite.

Michelle Maisto has been covering the enterprise mobility space for a decade, beginning with Knowledge Management, Field Force Automation and eCRM, and most recently as the editor-in-chief of Mobile Enterprise magazine. She earned an MFA in nonfiction writing from Columbia University, and in her spare time obsesses about food. Her first book, The Gastronomy of Marriage, if forthcoming from Random House in September 2009.